Press Release No. 10/222

Press Release No. 10/222
June 1, 2010

The Executive Board of the International Monetary Fund (IMF) completed on May 28, 2010 the third and final review of Costa Rica’s economic performance under a program supported by a 15-month Stand-By Arrangement (SBA) approved on April 10, 2009 (see Press Release 09/124). The authorities have indicated that they will continue to treat the arrangement as precautionary.

The completion of the third and final review enables Costa Rica to purchase an additional amount equivalent to SDR 41.025 million (about US$60.5 million), if needed. The review brings the total amount available for purchase to SDR 492.3 million (about US$725.8 million).

Following the Executive Board’s discussion on Costa Rica, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, stated:

“Costa Rica’s economic recovery is picking up speed, supported by rising consumer and business confidence. The authorities’ comprehensive response to the global crisis, supported by the Fund program, created a solid basis for the recovery. The external payments position has strengthened, and the exchange rate has fluctuated in the lower part of the band. The strong prospects for domestic demand create upside risks to the growth outlook and underscore the need to rebalance the macroeconomic policy mix.

“Performance under the Stand-By Arrangement with the Fund has been commendable. All quantitative performance criteria for end-December 2009 and end-March 2010 were met, and the authorities have continued to treat the arrangement as precautionary.

“The expansionary fiscal stance of 2009 was instrumental in softening the impact of the global crisis on economic activity. As the recovery becomes self-sustained, it will be important to start withdrawing the fiscal stimulus during 2010 and aim for considerable fiscal consolidation starting in 2011.

“Inflation fell to low single digits during 2009, and core inflation remains stable. However, inflation expectations remain above the central bank’s end-year inflation target, partly due to the strong prospects for domestic demand. It is important that the central bank stands ready to tighten monetary policy if this situation persists. Accelerating the transition to inflation targeting and greater exchange rate flexibility is also advisable.

“The banking sector remains sound, and the modest deterioration in prudential indicators observed in 2009 has started to abate. Further progress in the financial sector reform, including passage of legislation to strengthen the financial sector safety net, recapitalize the central bank, and enable consolidated supervision, would contribute to strengthening the system’s resilience,” Mr. Portugal stated.